Apple's iPhone 5 Is Pried Open and Its Profitable Secrets Start Bursting Out

The parts used to build the base model of Apple’s iPhone 5 cost a combined $205 to acquire and assemble, according to an early teardown analysis by market research firm IHS.

The teardown analysis by the firm previously known as iSuppli is still ongoing this afternoon and not yet complete. But here’s what has been found so far: Memory chips from Sandisk are in the phone, in a possible sign that Apple is curtailing its purchases from memory chip maker Samsung as a result of the acrimonious legal fight still ongoing between them.

Flash memory chips used for storage are estimated to add between $10.40 and $41.60 to the cost of the device, depending on storage capacity. The iPhone also has $10.45 worth of DRAM memory.

Another iPhone part previously supplied by Samsung — the battery — appears to have been supplied by Sony. In both cases, it’s likely that Apple is buying both memory and batteries from more than one supplier. This means that Samsung memory chips and batteries may still be found inside some iPhones and not others. The battery in the iPhone 5 cost $4, down from $5.90 on the iPhone 4S, IHS says.

The iPhone 5 also contains a wireless processor from Qualcomm and touchscreen controller chips from Texas Instruments and Broadcom. STMicroelectronics maintained its role in supplying the gyroscope chip.

The parts used inside the iPhone 5 cost a combined $197 for the base model while the cost of assembly runs about $8 a unit. The iPhone sells for $199 to $399 with a two-year contract, but without a subsidy-bearing contract it sells for $649 for the base 16-gigabyte model.

The findings are more or less in line with a preliminary cost estimate of $199 on the base 16-gigabyte model that IHS issued earlier this week. Known as a “virtual teardown,” it’s an educated guess at the manufacturing costs based on the iPhone 5’s documented specifications. Apple declined to comment.

The cost estimates don’t take into account costs for other items, including software development, packaging, shipping or distribution.

It’s also fairly close to the cost estimate range of $188 to $207 that IHS issued last year on the iPhone 4S. Apple is selling the iPhone 5 for $199 for a 16GB unit, $299 for 32GB, and $399 for 64GB.

That $9 difference between the component cost for the iPhone 4S and the iPhone 5 is important because it’s a relatively small difference between 3G and LTE or 4G phones, says Wayne Lam, analyst with IHS. “Most other phones built for LTE had much bigger displays, and everything got oversized. And that pushed the material costs higher,” he said. Apple’s screen is the same width as before, but is slightly longer than on the iPhone 4S.

Apple is also benefiting from a strategic investment in Sharp that paid off in the creation of a new in-cell touch-enabled display. The new display requires fewer layers than previous ones, and incorporates touch sensors directly into the display itself rather than using a touch-enabled overlay technology. The result, Lam says, is a display that is thinner than in previous generations of iPhone. The total cost of the display, IHS estimates, is $44, versus $37 on the iPhone 4S.

Another difference is in the wireless technology. With the iPhone 5 ready for LTE — Long Term Evolution — wireless networks, the cast of wireless chip suppliers has changed somewhat. Qualcomm supplied the primary wireless chip with additional chips coming from Skyworks Solutions, Avago Technolgies and Triquint Semiconductor. “We’re seeing a lot more parts from Avago and Skyworks this time around and only one from Triquint,” Lam said. The combined cost for the wireless components adds up to $34, up from $23.50 on the iPhone 4S.

There’s also a mysterious Apple-labeled chip that has not been seen in prior iPhones. Lam says it’s likely to be an audio chip of some kind. Apple is said to have been working on ways to improve audio and voice quality for phone calls.

In March, the firm took apart the latest iPad and came up with a range of estimates: $309 for the base Wi-Fi-only model to $409 for the higher-end 64GB 4G-ready model.

IHS regularly conducts teardown studies of wireless phones and other consumer electronics devices in order to find out who a company’s suppliers are. Like most manufacturers, Apple prevents its suppliers from identifying themselves publicly, much as they’d love to, so teardowns serve as confirmation of a relationship between a manufacturer and a supplier that is usually the subject of rumor and speculation.

The firm also estimates the combined cost of components — analysts check on the list prices of each part — to compile what is known in industry lingo as a bill-of-materials estimate, or BOM, that gives a fair idea how much a manufacturer, in this case Apple, makes in gross margin on each device sold. Apple doesn’t disclose its gross margin on a per-product basis, but when it reported its quarterly results on July 24, it said its overall gross margin was 42.8 percent.

In this case, the firm acquired five iPhones and disassembled them all. One thing the firm’s analysts were looking for was any variance in the identity of the memory supplier. Historically, Samsung, the world’s largest supplier of flash memory chips, has been a significant supplier — one of many — to Apple across its mobile product lines.

The Apple-Samsung relationship has been complicated by the epic series of smart phone patent lawsuits between them. Apple won a key round in the U.S. last month, winning a $1 billion judgment against Samsung in a federal court in San Jose, Calif.

Samsung still manufactures the A6 processor for Apple, continuing a relationship that dates back several years. Apple designs the chip. Early iPhone models contained processors designed and built by Samsung. IHS estimates the per-ship cost of the A6 to be $17.50 versus $15 for the previous generation’s A5.